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New rules to give more pension freedom protection

New rules to give more pension freedom protection

The Financial Conduct Authority has announced new rules and plans to help make pension choices clearer for over-50s, which it says will help up to 100,000 every year. 

The regulator says consumers will be sent 'wake-up packs' earlier – at the age of 50 rather than just a few months before they retire – telling them about their pension options.

It's also consulting on giving some consumers ready-made investment plans for their pensions, and making pension charges more transparent and predictions easier to compare.

Since 2015, 'pension freedom' means that anyone over 55 can choose to take their entire private pension as a lump sum – before that, pensioners could only take a quarter of the money as a lump sum, with most having the rest paid as an annuity, an amount paid out every year.

While this gives people more flexibility when accessing their pensions, it also means they can be left making complicated choices, and some could be left open to costly mistakes.

The Financial Conduct Authority (FCA) says it's "expressed concern" that some are withdrawing their private pensions but not properly investing them, meaning they're not getting enough out of their money to meet their needs.

It estimates that 100,000 consumers each year take a drawdown pension – an investment that pays you income – without getting any advice. It says the new measures will help stop these people losing out on pension income worth an estimated £25 million a year, and force providers to be more competitive. 

For more help understanding your private pension, see our Guide to taking your pension.

What is pension freedom?

April 2015 saw the most radical changes to private pensions for a generation, as the new pension freedom rules came into effect. Before, most people had to use their pension pots to buy an annuity, which gives you a guaranteed income for life. Now, anyone aged 55 or over can take the whole amount as a lump sum, paying no tax on the first 25% and income tax on the rest.

You effectively have five options when you take your pension. You can:

  1. Keep the cash in your pension – the default holding position until you're ready to take your money.
  2. Withdraw all the money in one go – the first 25% is tax-free and the remaining 75% is taxed as income.
  3. Take lump sums, leaving the rest invested in your pension until you need it – take cash as and when you need it, leaving the rest in your current pension.
  4. Take the tax-free cash then buy a drawdown product – take the whole 25% as a tax-free lump sum straight away and then with the remainder of the cash you buy an income drawdown product, which is an investment that pays you income, but also continues to allow you to withdraw lump sums if you need it.
  5. Take the tax-free cash then buy an annuity – this is a product that pays you an income each year for the rest of your life until you die. After that it's gone.

What are the new rules?

The FCA has announced a series of new rules to make pensions clearer, which will take effect on 1 November 2019:

  • Consumers will be sent "wake up packs" at age 50 and then every five years until they have cashed their entire pension. These will include a one-page summary document and a risk warning, along with reminders that consumers can get further guidance about their pensions.

  • Firms must assess whether consumers are eligible for an "enhanced annuity" and give them a market-leading quote. Enhanced annuities give a higher level of annuity income for those with reduced life expectancy. Pension firms will need to ask their customers questions to check whether they're eligible, and give them a quote based on what level of income they want their annuity to provide, rather than how much the annuity costs.

What other changes are planned?

The FCA has also proposed more rules to make pensions clearer, which it will be consulting on until April 2019. If the consultation is successful, the rules will come into force on 6 April 2020. The proposals are:

  • Firms should offer consumers "investment pathways" for their pensions. Under the proposed rule, consumers who choose the drawdown option without advice could choose one of four objectives for their pensions, and be offered an investment solution based on this.

  • Consumers should be warned about keeping their pension savings in cash rather than investing. Pension firms would need to make sure that customers who hold their pensions in cash are actively choosing to do so, and have been told about the likely long-term impact on their incomes.

  • Pension scheme providers should give consumers ongoing information about the charges they're paying. Consumers who are in the process of converting their pension cash into a retirement income would be given annual information about the costs and charges they've paid on their pension pots. This would be presented as a cash amount, in pounds and pence, to make it easy to understand how much has been paid.

What does the FCA say?

FCA executive director of strategy and competition Christopher Woolard said: "Our retirement outcomes review identified that many consumers are focused only on taking their tax-free cash and take the 'path of least resistance' when entering drawdown.

"This can often mean that the rest of their drawndown pension pot is not invested in a way that meets their needs and intentions. We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes.

"Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement."

What to read next...

For more help understanding your private and state pensions, see: